Time Warner’s Bet on 3D Movies: Right Move?

Time Warner (NYSE:TWX) owns the Warner Brothers movie studio and competes with Fox, owned by News Corp (NASDAQ:NWS) and Disney Studios, owned by Disney (NYSE:DIS). Warner Brothers is likely to announce a deal with Imax Corp. (NYSE:IMAX) for the release of several 3D movies over the next few years which we believe will help drive the box office revenues for Warner Brothers.

We estimate that Warner Brothers constitutes about 17% of the $26 Trefis price estimate for Time Warner’s stock and about 5% of our estimate is attributable to the box office component of Warner Brothers. We believe that 3D movies will drive box office revenues by increasing movie theater attendance and generate higher attendance ticket prices.

Increasing Contribution of 3D movies to Box Office Revenues

Recently launched 3D movies have been successful in attracting audiences and are increasingly contributing to box office sales. The 3D contribution to box office sales in the US and Canada increased from about 2% in 2008 to about 11% in 2009 ($1.1 billion). The popularity of 3D movies in 2009 resulted in 10% box office revenue growth in the US and Canada, the highest growth rate since 2005. The trend is continuing in 2010 with the new 3D film Alice in Wonderland which surpassed Avatar’s opening weekend sales by generating revenues of about $116 million.

We believe that two ongoing trends will help to make 3D films attractive for studios:

1. 3D Films are Driving Move Theater Attendance

Box office attendance in the US and Canada declined from about 1.6 billion in 2002 to about 1.3 billion in 2008. However, the figure increased in 2009 by 6% to 1.4 billion, partially attributable to several successful 3D movies launched in 2009.

We believe that 3D movies increase the number of films that the average moviegoer sees at the movie theater. You can see below how Time Warner’s stock could be impacted if US Box office admissions per moviegoer rise more than our expectations.

2. Higher Movie Theater Ticket Prices for 3D Films

With the release of more 3D movies in the future, we expect average movie theater ticket prices to rise. Ticket prices for 3D movies can cost up to $4 more than ticket prices for traditional movies and movie viewers are willing to pay the premium for quality content.

You can see below how Time Warner’s stock could be impacted if average ticket prices in the US were to grow more than our expectations as result of 3D films.